An influential committee of MPs has accused the Department of Health of "inventing rules and processes on the hoof" following an investigation into the future financial stability of the NHS.30 Oct 2012

In its report, the Public Accounts Committee (PAC) said that the Government had been "unable to explain" the circumstances under which an NHS trust would be placed into the new special administration regime and how it would ensure that essential services were protected should a trust fail. In addition, by making additional financial support available to struggling trusts on an ad hoc basis, financial problems within the NHS were not always transparent, it said.

The report comes the day after it was recommended that South London Healthcare, the first NHS trust to be put into special administration, be dissolved and services divided between other providers in the area.

"The Department of Health could not explain to us how it will deal with an NHS trust that goes bankrupt," committee chair Margaret Hodge said. "Nor could it provide reassurance that financial problems would not damage the quality of care or equality of access to all citizens, wherever they live. The overall surplus of £2.1 billion across all NHS bodies in 2011-12 masks the fact that a significant minority are in financial difficulty ... Up to now financial problems have often been hidden, with struggling trusts being bailed out through additional financial support from the NHS and the Department."

Of particular concern to the committee was the number of "unaffordable PFI contracts" held by a number of trusts in financial difficulty, which it said that in many cases came with fixed annual charges so high that the trusts could not break even. The Department expects to bail out seven trusts facing problems with PFI repayments over the remaining life of the contracts, at a total cost of £1.5bn or £60 million a year. The Department is ultimately liable for supporting NHS PFI projects because it underwrites the 'Deep of Safeguard' provided to contractors, the Committee explained.

NHS organisations in England reported a combined overall surplus of £2.1bn over 2011-12, according to the report. However, the combined deficit of the 10 NHS trusts, 21 NHS foundation trusts and three Primary Care Trusts (PCTs) that were struggling amounted to £356 million. Eleven of the NHS foundation trusts, which are trusts with a certain amount of independence from the Department of Health, would not have gained that status today given their financial performance, the report said.

However, the true financial sustainability of hospital trusts was "even more serious" than these figures suggest, according to the report, due to financial assistance provided to trusts by the Department of Health, PCTs and Strategic Health Authorities (SHAs). Without this funding, which included cash injections amounting to some £1.1bn by the Department, a further 31 NHS trusts and 11 Foundation trusts may not have broken even, the report said.

The report also outlined the Committee's concern in relation to the Unsustainable Provider Regime, which was established in 2009 and gives the Health Secretary the power to appoint a special administrator to review an NHS Trust if "appropriate in the interests of the health service". When asked to provide evidence to the Committee, the Department was not able to explain clearly what would trigger a trust being placed into the regime and how decisions would be made about the trust's future. The Committee was "particularly surprised" that the Department was unable to provide details of how the process will work in relation to South London Healthcare, the first trust to be placed into special administration, it said.

Responding to the "hugely important" report, Mike Farrar of representative body the NHS Confederation said that the Government needed to carefully consider the financial pressures facing the NHS.

"Propping up struggling trusts with short-term solutions is not the answer," he said. "We need to take action before we reach crisis point. We must ensure the rules developed to deal with 'failing trusts' are clear and flexible enough to allow organisations to act quickly and tackle problems long before they reach breaking point."

The "fundamental issues" facing the NHS were "much deeper" than those caused by the impact of PFI, he added.

"We absolutely need to look at alternative funding models for financing NHS estates, but we must also remember that PFI is not the sole reason why organisations find themselves in financial distress," he said.